Very few technologies have enjoyed as much attention lately as blockchain. Most industries are investigating the opportunities offered by this technology to their business. And financial services, with bitcoin and other cryptocurrencies as a striking example, probably even more so than others. Blockchain does indeed offer quite a few opportunities, but there are also some threats involved.
What is blockchain?
It is hard to find a definition of blockchain everybody will agree on. But most experts will at least agree on the following statements:
- Blockchain is the technology underlying cryptocurrencies such as bitcoin.
- It is a digital ledger containing all information associated with cryptocurrency transactions. This information will always be checked and verified.
- The cryptocurrency miners used to perform this verification, need powerful computer systems to resolve the required hash functions to add the verified transactions.
- Once a verified transaction and its associated hash algorithm have been included in the next block of the blockchain, they become an unchangeable part of the overall ledger.
- Cryptocurrency miners receive a small digital currency profit for their efforts.
Opportunities for financial services
Bitcoin and other cryptocurrencies have already demonstrated how well blockchain and financial services can get along. But it is easy to understand why some (especially central) banks are wary of the consequences of a system needing no central authority. So where do the opportunities lie for financial service organizations? to take advantage of the benefits of blockchain. According to Deloitte, they include:
- Supporting international transactions: Blockchain does not care border: it is unchangeable no matter where it is used. That’s why it could well be used to enable faster and more streamlined cross-border transactions, reducing and speeding up the slow and costly process, by considerably reducing the complexity involved.
- Enabling share trading: Blockchain and cryptocurrency could also be leveraged within the stock market to allow for streamlined share trading with boosted accuracy and faster settlement.
- Enhancing identity management: A blockchain-style system for online identity management would allow users to register themselves on the blockchain and then choose who is granted insight in their identity.
- Improving loyalty rewards: Deloitte noted that banks could also utilize blockchain as a way to better trace transactions, and provide improved rewards for customer loyalty programs.
Threat # 1: Cryptojacking
Despite the opportunities that blockchain can provide, there are also a few issues that financial service providers should be aware of.
First is cryptojacking, the malicious activity that has emerged with the rising popularity of mining. As noted, a cryptocurrency miner receives a small reward for verifying and enabling the next set of transactions in the blockchain. Unsurprisingly, cybercriminals have taken note and are now taking over victims’ systems for this purpose, which is known as cryptojacking. Cryptojacking is still on the rise, with some famous examples such as a campaign that impacted almost 1,500 websites.
Threat # 2: Immutable nature of the blockchain vs GDPR
Another important aspect to understand about blockchain is the fact that transactions added to blocks in the chain are uneditable and unchangeable as soon as they are verified and included in the digital ledger. Changing one part of a block could impact all the subsequent blocks added afterwards – similar to a long math problem, wherein a mistake early on affects all calculations that followed.
This part of the blockchain process does raise some concerns when dealing with the General Data Protection Regulation (GDPR). The GDPR includes several key data protection rules for EU data subjects, such as the Right to be Forgotten: each EU citizen can request that organizations using their personal data remove this information from the record. But when these data are included in a blockchain, this can have disastrous consequences for the integrity of the ledger.
One of the only ways to ensure compliance with the GDPR while maintaining the integrity and accuracy of the blockchain would be to create a system that enable the dissociation of a particular identity with the relevant information included in the blockchain. In this way, data subjects can be protected and the unchangeable blockchain can persist.
Overall, blockchain is still a complex and immature, emerging technology. However, it does provide certain opportunities for financial service providers who are willing to also consider and balance these benefits with associated risks.
To find out more about blockchain and its use in financial services, connect with the experts at Trend Micro today.